The Consumers’ Association has missed a major point on equity release.

Like many within the industry I would not criticise the Consumers’ Association for trying to inform consumers and increase their understanding as such a task is highly commendable.

But in doing so, it has overlooked the issue of whether equity release is appropriate for inheritance tax planning, a practice that could cause advisers and providers alike a real headache in the future.

Sadly, it is a fact that around half of plans sold for IHT planning will leave the client worse off than if they had done nothing. It is worth stating that all the scenarios described below assume that simple estate planning exercises have been completed.

The table on the page opposite illustrates the problem for a typical couple, both aged 70, living in a 1m house, who use the capital raised from equity release to buy a whole-of-life contract.

For over 50 per cent of customers, all but one of the equity-release-based schemes would be ineffective – that is, cost the client more money than he or she saves. This is broadly true for all custom-ers over the age of 65.

But how should we use equity release to minimise IHT on property?

Assuming that the best possible legal planning has been undertaken and that your client will not sell and move to a smaller house, they are left with bricks and mortar of significant capital value that cannot simply be given away in small chunks.

At face value, equity release used for IHT planning – where the capital raised is used to fund the IHT solution – appears to deal with the IHT bill quite neatly.

But, as we all know, and as the Which report highlighted, the cost of releasing the equity can be high if you live a long time. This is where conventional equity release used in this way falls down, as most people will live to a point after which the interest accrued on the equity-release scheme will exceed the IHT savings made.

Of course, if someone has a lower than average life expectancy, they will not be able to take out the whole- of-life contract on standard terms, which will then make the structure less efficient. This means that there are only very narrow circumstances where using equity release to mitigate IHT can be considered good advice, as highlighted by the FSA in its mystery shopping last year.

What other options are available?

Passing the residence on to the heirs as a gift with reservation of benefit – that is, continuing to live in it – will not remove its value from the estate. The client will pay pre-owned asset tax unless the full commercial market rent is paid – out of taxed income – for continuing occupation. This is simply not an affordable option for many.

Unless the monies extracted are ring fenced and grow in line with the debt, there is little benefit in this option, with the added problem that the estate cannot get probate to distribute to the heirs until the debts and tax liabilities are paid.

But what about using the funds to buy a Wol policy or annuity as a feeder mechanism?

At first glance, this looks like a good solution, as the Wol policy can be written under trust and so excluded from the client’s estate subject to a potentially exempt transfer on the premium paid.

However, as the table shows, this is effective only in the short term and, in reality, for many elderly clients it is unlikely that life cover needed will be available as the premium may be prohibitive and medical underwriting will almost certainly be required.

Property Wealth Manager from Close Brothers is a very specific IHT planning tool which can produce significant IHT savings. It uses a standard reversion scheme in a rather unusual but effective manner. The cash released funds a single-premium unit-linked whole-of-life policy, insured to the value of the property less a 6.5 per cent bid-offer spread.

As the contract is unit-linked, the sum assured will then grow in line with property prices and this cover is guaranteed without payment of a risk premium.

The policy is split into 100 separate bonds which invest in all the properties purchased. The policy is generally written in trust for the chosen benefic-iaries and so its value is removed from the estate, assuming that the original owners survive for seven years. Even if they do not survive seven years, the IHT liability is still significantly reduced as the potentially exempt transfer applies to the policy premium, which is typically around half of the sum assured.

If clients decide to retain some of the policies for their own future use by early surrender, the same surrender value discounts are applied, reflecting the clients’ expected mortality. However, if used solely as an IHT mitigation – as the product designers recommend – the discount factors are only of acad- emic interest.

Because the transfer of the property into a fund of all properties allows the customer to benefit from future house price movements, albeit of the fund rather than the individual property, this also enables the beneficiaries to subseq-uently buy the property back if they so wish.

As the table shows, the benefits of PWM are gradually eroded by annual charges the longer the client lives but such erosion is significantly less than under conventional equity-release/IHT schemes, and in most cases effective savings can be demonstrated beyond 30 years.

We would never suggest that Property Wealth Manager is the perfect solution for everyone but we can guarantee the efficacy of the product and its ability to reduce substantially exposure to an IHT liability for most suitable clients.

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14th August 20182:45 pm

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